Why do we have a charitable tax deduction, anyway?

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CORRECTION: In the original web story, we incorrectly referred to the tax break you get for a charitable donation. The deduction is the total amount of the charitable donation, you only get a portion back as a tax break. The text has been corrected.

The holiday season is the time when many Americans do their end of the year charitable giving. A third of American tax payers itemize deductions and 80 percent of those Americans take advantage of the charitable tax deduction. As we head toward the fiscal cliff, capping deductions for charitable giving is being discussed in Congress as a revenue booster, but nonprofits are worried if that happens, donations will drop off.

Why do any of us get a deduction for charitable giving, anyway?

Joe Thorndike, the director of the Tax History Project at Tax Analysts, says you have to go back to World War I for the answer. Nearly a century ago, Americans paid income taxes at a rate of 77 percent to help fund the war effort.

“So this was designed as an off-set for wartime tax burdens,” says Thorndike. “They were going to try to insulate charities from the negative effect that would probably flow from those new high tax rates.” And Thorndike adds that, back then, the rich were the only Americans who paid income taxes, so the charitable tax deduction was designed to benefit, well, the rich.

Fast forward to another war, World War II. To fund that war, the government broadened the tax base, which meant more people could use the charitable tax deduction. Still, says Thorndike, the richer you are, the higher the tax bracket you’re in, the more you get back. Someone in the 35 percent tax bracket gets a $350 break for a $1,000 charitable donation. Someone who makes less money and is in the 25 percent bracket gets less, only $250.

Some economists say that’s not fair and everyone should get the same benefits from giving. But, John Ashmen, president of the Association of Gospel Rescue Missions, says that change would will hurt charities.

“At a time when we should be encouraging everyone and giving everyone possible an incentive to help the poor, we seem to be experimenting with disincentive,” says Ashmen.

“It makes perfect sense when you think about it, but it’s sort of odd to hear a poor person’s advocate make a rich person’s argument,” says Thorndike. He says the question politicians are wrestling with, as we head toward the fiscal cliff, is whether the value to the nonprofits outweighs the cost of the charitable tax deduction to the federal budget.